More interest rate cuts expected from Turkish Central Bank

Bolstered by the annual inflation rate decrease to 6.6 percent in April and the government's continuous calls for further interest rate cuts, the Central Bank of the Republic of Turkey (CBRT) is expected to continue cutting interest rates at the upper bound of the corridor despite the recent devaluation in the Turkish lira, as discussed during the May 2016 Monetary Policy Committee (MPC) Meeting.

While the estimations approximate around 50 basis points, economists suggest that the economy management composition of the new government is being closely monitored by the markets. They also suggested that the future reactions in the markets can be determinant factors for interest rate cuts. According to a Reuters survey of 18 domestic financial institutions, while 11 participants expect a 50 base point cut at the upper bound of the corridor and four participants expect a 25 base point cut, three participants do not foresee any changes. All of the institutions participating in the survey expected policy rates and the stabilization of the lower bound of the corridor.

While the CBRT has maintained the overnight borrowing rate - the lower bound of the interest rate corridor - at 7.25 percent and the one-week repo rate - the policy rate - in at 7.5 percent, it moved the upper bound of the corridor, the overnight lending rate, to 10 percent with a 50 basis point decrease in April. Banks' average borrowing cost has maintained the 8.47 percent level as of May 18.